The sustainability of the UK’s higher education system

Skills have become the currency of 21st century economies and, despite the significant increase the UK has seen in university graduation over the last decade, the earnings of workers with a university degree remain over 80% higher than those of workers with just five good GCSE’s or an equivalent vocational qualification. Sure, not every university graduate will end up with a great salary, but on average they take an additional £160 000 home over their working life, and that's even after discounting tuition, forgone earnings, and the higher tax bill that comes with a better salary. Some say these trends are all futures of the past, and that the job prospects of future graduates may look much worse, particularly if bringing in more and more people eventually means including less qualified applicants. But people have been saying these things ever since I began tracking those numbers over a decade ago and the bottom line is that, so far, the rise in knowledge workers has not led to a decline in their pay, as we have seen for people at the lower end of the skills spectrum.

That brings up the question of who should pay for this, because there simply is no free university education.

The Nordic countries pay for universities through the public purse and even subsidise the living costs of university students. It makes sense for them because participation is almost universal and they have a steeply progressive tax system so that they can recuperate the funds from graduates who typically end up as the better earners.

European countries like France, Germany or Spain, too, say higher education is important, but their governments are neither willing to put in the required funds nor allowing universities to charge tuition. They end up compromising quality and restricting access, with the effect that all workers end up paying for the university education of the rich parents’ children.

The third alternative is to allow universities to charge tuition, and interestingly, OECD data show absolutely no cross-country relationship between the level of tuition countries charge and the participation of disadvantaged youth in tertiary education. In fact, social mobility is worse in Germany which pays for all university education through the public purse than it is in the UK.

But getting tuition right is not simple either. If countries put the burden for tuition entirely on the shoulders of families, they risk not attracting the brightest but the wealthiest children to attend, which means not making the most out of the country’s talent.

If countries rely mainly on commercial loans which students have to repay once they finish their studies, they still leave students and families with the risk, because the promise of greater lifetime earnings of graduates is a statistical one, and there is actually very wide dispersion in earnings. The UK, and some other countries too, have tried to square that circle with a combination of income-contingent loans and means-tested grants. That basically means risk-free access to financing for prospective students with governments leveraging, but not paying, for the costs.

The loans reduce the liquidity constraints faced by individuals at the time of study, while the income-contingent nature of the loans system addresses the risk and uncertainty faced by individuals (insurance against inability to repay) and improves the progressiveness of the overall system (lower public subsidy for graduates with higher private returns). In the UK, the repayments of graduates correspond to a proportion of their earnings and low earners make low or no repayments, and graduates with low lifetime earnings end up not repaying their loans in full.

But even the best loan system is often not sufficient. There is ample evidence that youth from low income families or from families with poorly educated parents, but also youth who just don't have good information on the benefits of tertiary education, underestimate the net benefits of tertiary education. That’s why it has paid off for the UK to complement the loan scheme with means-tested grants or tuition waivers for vulnerable groups.

Sure, those loan and grant systems cost money, and have shifted risks to government which will end up paying for any bad debt. Indeed, it is very likely that repayment rates will end up a lot lower than what the government anticipated. But these costs are just a tiny fraction of the added fiscal income due to better educated individuals paying higher taxes. Keep in mind that the added tax income of those graduates who end up in employment, on average over £80 000 in the UK, is many times larger than any conceivable bad debt.

There is lots the UK can do to further improve its approach to financing universities. For a start, it can do better with aligning course offerings with societal demand. I also worry that the loan repayment parameters mean many middle income workers – such as teachers, health professionals, public sector workers - will end up paying more for their education than better earners such as lawyers and bankers. But among all available approaches, the UK offers still the most scalable and sustainable approach to university finance.

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